The Contractor Agreement defines and establishes the terms of the contractor relationship. This document is generally used to define a commercial relationship when working with a specialist, consultant, or freelancer on a contractual basis. It stands in contrast with an employment relationship, which must comply with the Fair Work Act.

Advantages of Hiring a Contractor

Here are some of the key benefits of hiring a contractor.

Reducing costs

Contractors are often receive a higher hourly rate of pay than full time employees. However, unlike full-time employees contractors don’t have employer benefits such as paid sick and holiday leave, superannuation, office space, equipment or education costs.

Flexibility

Contractors often have a flexible schedule and don’t need an office space. This flexibility can be useful to your business and there is also no long-term commitment to contractors. Contractors are usually experts in their given field, this can reduce the resources required to train employees and lower supervision costs.

Lowering the risk of legal action

Full-time employees are protected under Commonwealth and State laws and regulations and have the ability to take legal action against your business, should they feel their employee needs are not being met. This is not the case for contractors who are not covered under these regulations.

Identifying your business needs and the savings opportunities with contractors is a worthwhile discussion among management. It’s possible, too that when you hire a contractor, you open new doors to other opportunities, or even offer a full-time opportunity to a good candidate in the future.

Disadvantages of Hiring a Contractor

Hiring a contractor for your business can also have some downfalls, as discussed above they demand higher rates as they consider themselves self employed and are excluded from employee benefits. Businesses must also walk a careful line so an agreement or contract with a contractor doesn’t turn into the need for government-required benefits.

Disadvantages

Lack of control

Contractors are essentially self-employed – they work on their own time and may work away from the office. Unlike your employees who can be monitored, contractors have a certain freedom and are largely independent prohibiting close supervision. Contractors may also have a few modes of employment hence at times your business needs may not take priority.

Lack of continuity

Contractors regularly come and go. Unlike full-time employees, you can hire contractors to undertake short and long-term or large projects. A risk when you hire a contractor is your contractor abandoning your project if one of their clients takes precedence over you. If your business requires someone for a long term project, it may be best to employ someone full time.

Higher costs

It is important to discuss salary or payment before you and your contractor sign the Agreement. As mentioned above, contractors do not have the same benefits and leave as full-time employees. As a result, contractors can end up costing more to your business.

Ownership

As contractors do not work in a full-time capacity, the work they produce may have copyright issues and also not belong to your business. For this reason it is important to remember the golden rule: Put it in writing. For example, let’s say you need some work done on your IT systems or software, and you ask a contractor to help. If you do not have a clear assignment in writing of the copyright in the work that the contractor does for you, you will not end up owning the copyright in their work even though you paid for it. This is because the Copyright Act requires all assignments of copyright to be in writing.

As stated above, be careful that the relationship with your contractor is of an employer-contractor nature. If the government audits your business and your relationship with your contractor is the same as your full-time employees, the contractor may be able to receive benefits, workers compensation, and other regulations or protective rights.

Is this a contractor or an employment relationship?

This is the most important question you should be asking when engaging a contractor, as there are severe legal risks to misclassifying employees as contractors, which is also known as sham contracting. On 26 August 2024, new legislation confirmed that the relevant test is the whole-of-relationship test. For more information on the legal definition of employee, see the following article.

Main sections of a contractor agreement

Work description and schedule

The contractor agreement describes the work that the independent contractor must provide. The scope of the work should be specified in the agreement. This can include, for example, the construction or renovation of a house, designing a website, or advice on a business project. The individual aspects of the work will also be specified in the agreement. The work required to be completed may be divided up into stages or segments. Usually, this occurs in contractor agreements for the construction of a house. The agreement must also specify the duration or length of work. For example, this can involve a certain date when the contract comes to an end. Otherwise, the agreement may require a specific amount of work hours.

The agreement should describe the work in clear terms. The contractor must be clear on the expectations of the company prior to commencing work. This includes ensuring that the company’s special requirements relating to the work (such as the specific brand, style or colour of an item) are conveyed to the contractor. Importantly, both the contractor and the the company must be aware of the expected schedule. Parties can take the opportunity to negotiate a schedule based on their requirements. The contractor must be careful not to agree to something he cannot deliver, to a schedule he cannot meet, or to make guarantees he cannot keep.

Payment

The contractor agreement should specify the payment for the services. It should also specify the timeframe for the payment. The parties can negotiate the payment timeframe. The company may pay a lump sum at the end of the agreement or an hourly rate for the work. Usually, payments will be linked to each stage of the work. The contractor receives payment on the completion of each stage. The agreement must also specify the payment method. This involves specifying whether the payments are electronic or not, when an invoice should be sent, and what account should receive the payment. The contractor should ensure there is a fee for late payments.

The company may reimburse some of the contractor’s expenses such as travel expenses. The agreement should specify the conditions for reimbursement. The conditions can be that the contractor should pre-approve the expenses or provide an invoice. Some payments will explicitly not be reimbursable. This includes the contractor’s fees for licensing, corrections, and insurance premiums.

Termination

It is important that the contractor agreement specifies how both parties can terminate the agreement if needed. This will require specifying terms which can cause a breach of the agreement. Various breaches may be agreed upon. It will also involve specifying a notice requirement (30-day, 15-day) for a notice of termination ending the relationship. It might be necessary to set out the circumstances where the agreement can be terminated without any notice. This may be for serious breaches of the agreement. Both parties must choose a period of notice that they are satisfied with. The contractor agreement may also specify what must occur on termination such as returning the property used by the contractor. It might be necessary to place a clause about intellectual property that holds that the any work created by the contractor belongs to the company

Alternatively, the contractor agreement may set out an expiry date where the relationship will naturally come to an end. In light of this, it might be necessary to specify an option to renew the contract.

Restraints

The company may restrain the contractor from specific actions. The restraints may apply while the agreement is active or when the agreement is completed. For example, the company may restrain the contractor from working anywhere else while working for the company. The agreement may also contain a non-solicitation clause. This can prevent a contractor from soliciting clients or employees of the company. The agreement may contain a non-compete clause. This can prevent a contractor from a opening a competing business. Alternatively, the clause may prevent a from working for another company that is competition with the hiring company.

Working with other employers while the agreement is active might be necessary to keep your business running. A contractor should negotiate to remove this restraint, if possible. Notably, courts only enforce ‘reasonable’ restraints. It is possible for a court to read down a restraint clause so that it is not unreasonable under the Restraint of Trade Act 1976 (NSW). Further, non-compete clauses are not effective where the contractor is working within his chosen field.

Dispute Resolution

It is possible that disputes can arise between contractors and the company. So, it is important that the contractor agreement sets out the procedure for how to resolve the dispute. It would be valuable for a contractor to ensure that alternatives to a court trial, like arbitration and mediation, are provided for in the agreement. Good faith negotiations prior to dispute resolution might also be valuable for a contractor.

Use this Contractor Agreement (Individual) if:

• You are engaging the services of someone as an Individual Contractor instead of an employee of the company;
• You want to ensure that the company owns any intellectual property that is developed by the contractor for the company; and
• You are looking to eliminate any confusion about each party’s rights and obligations.

Other documents you may need:

• Service Level Agreement
• Non-Disclosure Agreement (One Way)
• Sub-Contractor Agreement

Frequently Asked Questions

A Services Agreement

A Services Agreement is commonly used between two parties, one of which will provide the service, and the other who pays for the service. Often these agreements involve key dates, rights and obligations, payment, IP rights, termination, non-solicitation and liability and waivers.

Non-Disclosure Agreement

A Non-Disclosure Agreement (NDA) is a legal document that restricts one or both parties from disclosing confidential information to another person or entity.

Why Do Companies Hire Contractors?

Commonly, hiring a contractor is ideal when businesses need to complete short- term work. Often, this work is specialised and requires the expertise and specific equipment that the contractor possesses.

What Are Common Services Hired as a Contractor

A few services for which contractors are hired for include:

• Construction work
• Writing and drafting content for a company, which are often commonly known as freelancers
• Photography and filming
• Web developing

Further Information

• How to Hire a Contractor
• Contractor vs Employee: What’s The Difference?